In a research report dated 5 March, Macquarie Equities Research (MQ Research) wrapped up 4Q19 results, highlighting that 55% of companies under MQ Research’s coverage met or beat expectations, with banks showing the highest proportion of beats.

While 1Q20 is expected to provide negative surprises due to the COVID-19 virus, MQ Research expects a recovery in earnings and valuations into 2H20. MQ Research also reduced its year end KLCI target by 3% to 1,672 points, post 4Q19 results.

Event

• 4Q19 results showed 55% of companies under MQ Research expanded coverage (50 vs 45) met or beat expectations – similar to 3Q19. One significant positive from the 4Q19 results season was the increase in dividend payments from banks and GLCs, in particular. Transport, construction and plantations had the highest percentage of misses while banks showed the highest proportion of beats. While revenue lethargy continued to drag, there was a pick-up in provisions at various companies, leading to an exaggerated 44% quarter-on-quarter (q/q) decline in aggregate reported profits of the companies under MQ Research’s coverage.

• 1Q20 is likely to provide negative surprises as a result of the COVID-19 virus and its impact on tourism and general activity levels. The recent political situation is also likely to have delayed government-related projects. Nonetheless, as the political situation settles down, COVID-19 news flow abates and government procurement picks up, MQ Research expects a recovery in earnings and valuations into 2H20 – noting, however, that 20E earnings are unlikely to fully recover given the 1H20 impact.

Impact

• Year-end KLCI target reduced to 1,672. MQ Research reduces its KLCI index target 3% to 1,672 following earnings updates post 4Q19 results. MQ Research’s core 20E KLCI EPS growth forecast remains steady at 8.3%. Meanwhile consensus earnings per share (EPS) growth estimates for 20E have increased from 6.1% (post 3Q19 results) to 9.0% as a result of the lower 19A base.

• Near-term risks to earnings. MQ Research would expect expectations for 2020E to ease as a result of the virus as well as potential delays to government-related projects on the back of the recent political tussle. Nonetheless, as news flow around these turn around and the new government kickstarts procurement into 2H20, MQ Research sees upside risks for 21E, which is likely to become the focus of the market.

• Bank stats show deceleration, asset quality stable. Confirming the above, January bank stats offered little opportunity to be optimistic for 1Q20 with headline loan growth decelerating to a low of 3.5%. While Chinese New Year seasonality could be blamed, working capital loan growth contracted marginally (-0.4% y/y) for the first time since 2009. Asset quality however, remained stable albeit with a slight uptick in gross non-performing loans to 1.6%.

Outlook

MQ Research replaces Telekom Malaysia with Econpile in its top picks list as MQ Research sees improved news flow around construction in the coming months spurring a rerating here. In the near term MQ Research expects the export-oriented names in its list to outperform and would buy into weakness for the others.

Source: Macquarie Research - 6 Mar 2020